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Monday, 8 July 2013

Half-Time Equity Sector ETFs Perspective

This research forms the basis of
FPM’s top-down cross asset allocation for 2H13 into 2015. We examine expectations
for the global equity sector based on rear-view mirror look at ETFs performance.
The window period of scrutiny is June 2007 to now, as at end-May 2013. This
period is arguably poignant since it heralded the financial crisis, peaking in
Sep 2008, and now with global equity indexes testing pre-crisis record levels.
Presented below are life-history charts of the S+P 500 and its proxy ETF
SPDR S+P 500 (SPY). We think this is “half-time” based on the prognosis of
the approximately 10-year cycle that we entered, according to the Rogoff and
Reinhart assessment of the state of global economics.

Also, the period from June to May
tends to excludes “window-dressing” price-action. For comparison sake, the
analysis window is also dictated by latest ETF inception, for the “Overlap
Performance” analysis. Master limited partnerships or MLP sector ETFs as
represented by “Alerian MLP ETF (AMLP)”
launched in Sep 2010, hence why the overlap performance period starts Sep 2010
to end-May 2013. This is 3 months short of 3-years’ analysis period. The second
analysis is “Inception Performance” of the sector-proxy ETFs. For the full
half-year ETF sector analysis to end June 2013, or for any other customized portfolio
and study-period please contact FPM.

We’ve calculated 12 statistical
risk-return metrics for 70 ETFs, each serving as benchmark for equities, with a
bias on US markets. Using Noah’s Ark
amalgam of the best of breeds, we selected the two largest capitalized ETF
proxies for 35 equity sectors, as classified by Etfdb.com.
We’ve added qualitative analysis to the quant metrics in terms of geopolitical
considerations, among other issues such as globalization and climate change. So
we discuss less about idiosyncratic company fundamentals and risks, and more
about the big picture ideas. We also bias our analysis towards Sociably
Responsible Investment themes. Our ideological corporate reputation matters even
if we fall short of that in practical matters.

At this market juncture, equities
are in vogue and promoted as the great rotation away from credit investments. This
research forms the basis of FPM’s top-down equity asset allocation for 2H13
into 2015

FPM found Health+Biotech sector equity performance of near 100% total
returns, on compounded basis for the study period based on adjusted closing
prices of select ETFs.

Refer to Fig.1, highlighted by
green in first column against “iShares
Nasdaq Biotechnology Index Fund (IBB)”. Note that these returns reflects
dividend and splits adjusted Yahoo.com historical prices performance at
month-end. We have not examined the underlying constituents of the discussed ETFs
to confine this note to top-down sectoral research.

From our “Mirror View Thesis” of this sector analysis, FPM believes that an
inverse image is in view for the next half of the Health & Biotech industry
fortunes. Based on tougher industry regulation from restricting pernicious
industry practices we expect this sector to experience slower growth. We are
not shy of supporting controversy but there are healthy trends which check the
growth of traditional pharmaceutical companies. Such as the growth of
‘alternative therapies’ of homeopath and naturopath sciences.As well as the advent of ‘genome mapping’ of
individuals with DNA-biotech and geneology. These evolutions in the human
health and well being industries generally present a challenge to the existing
establishment of big pharmaceutical. For instance a drug for epilepsy was
directly found to cause babies of the drug-taking mothers to be born with severe
disabilities of retardation. See UK
Guardian national newspaper revelation. The crux of the story was that
because pregnant women cannot be used as guinea-pigs for epileptic drug
testing, this drug was allowed to pass FDA drug approval and be sold
internationally to pregnant mothers! So now we know who were deceived to be
guinea pigs and with tragic disastrous human consequences, perpetrated by those
involved with the Epilim drug coming to market. What obscure legislative loop-hole that flagrantly
allowed the next generation of patients to be born dependent on health and
biotech innovations. No small wonder that the naturopath and homeopath
alternatives medicines are being pursued. The human tragedy from
corruption-riddled corporate activities are generally being checked but it is a
David and Goliath battle. Life-changing technology of viral memes in
information from the internet permeates via the whistle-blowing industry. The
mega pharmaceutical company bubble that will burst for this solitary reputation
indiscretion, but by no small means the only example of “willful blindness”, is
Sanofi-Aventis. We
don’t feel we need to look at the underlying constituents of ETFs or other funds
to know that this large market-capitalized pharmaco is in major savings portfolios.